Divergent monetary policies supporting USD; significant uncertainty surrounds Greece and poses real risk for the Euro

By Ian Dobbs*:

Divergent monetary policy between the United States and most other developed nations is driving the push toward a stronger USD.

The US look set to stay on track for an interest rate hike around the middle of this year, while many other central banks are actively erasing or adjusting to a more ‘dovish’ policy stance.

The latest bank to adjust its stance will likely be the Reserve Bank of Australia when they release their statement this afternoon. There is plenty of talk about a potential cut, but failing that a move to an easing bias is extremely likely.

Significant uncertainty remains around Greece and its debt pile and this poses a real risk for the Euro over the coming weeks.

We are yet to see this translate into broad based Euro weakness, but that remains a distinct possibility if some middle ground between the new Greek government and Troika (IMF, ECB and EC) can’t be reached.

Major Announcements last week:

• US Durable Goods Orders -0.8% vs +0.6% expected

• Australian CPI 0.2% vs 0.3% expected

• FOMC leave rates unchanged

• RBNZ leave rates unchanged but move to a neutral bias

• Eurozone CPI -0.6% vs -0.5% expected

• Canadian GDP -0.2% vs 0.0% expected

• US Q4 GDP 2.6% vs 3.0% expected

• Chinese Manufacturing PMI 49.8 vs 50.3 expected

• US Manufacturing ISM 53.5 vs 54.9 expected

NZD/USD

NZD/AUD (AUD/NZD)

This pair has continued to show little overall direction the past week with trade largely contained between 0.9300 and 0.9400 (1.0753 and 1.0638). The low of 0.9262 (high of 1.0797) was made in the immediate aftermath of the RBNZ’s move to a neutral stance on Thursday, but it was short lived and the cross quickly recovered back toward 0.9350 (1.0695). Near term direction will now be dictated by the result of today’s Reserve Bank of Australia rate meeting. It is a close call whether the central bank cuts interest rates or not and as such we could see a significant reaction in the AUD either way. Support on the downside comes in around 0.9200 (resistance around 1.0870), while key topside resistance to keep an eye on is around 0.9440 (support 1.0593).

NZD/GBP (GBP/NZD)

The New Zealand dollar snapped lower against the UK Pound after the RBNZ moved to a neutral stance last Thursday. The pair traded down to just under 0.4800 (high over 2.0833) heading into the weekend, but has the NZD managed a small bounce in the early part of this week. The broader trend however is still very much to the NZD downside and only a break above 0.4900 (below 2.0408) would threaten that. We have now seen a very sharp move down from the 0.5200 (1.9231) level that was trading less than a month ago and with momentum starting to fade this would suggest a break below the 2014 low at 0.4747 (2.1066 high) is unlikely in the near term. There is plenty of data from both countries to digest this week with the construction and service sector PMI’s from the UK along with the Bank of England rate meeting. From NZ we have Fonterra’s latest dairy auction, employment data and a speech from Governor Wheeler over the coming days.

 NZD/CAD

Both the New Zealand dollar and the Canadian dollar have been struggling recently, seeing significant selling pressure at times. The result for the cross rate has been choppy sideways price action, but with little overall direction. This has actually been the case since the beginning of October last year with 0.9100 to 0.9400 largely containing price action for the past four months. At this stage there is nothing to suggest that will change in the near term. Dips toward 0.9100 should continue to find support and buying into that weakness is the favoured strategy. Tomorrow from Canada we get Ivey PMI, then later in the week the trade balance, building permits and employment change are all set to hit the wires. While from NZ this week we have Fonterra’s latest dairy auction, employment data and a speech from Governor Wheeler to digest.

NZD/EURO (EURO/NZD)

After breaking lower in the wake of last Thursday’s RBNZ statement, the New Zealand dollar has since been stuck in a tight trading range to the Euro around the 0.6420 (1.5576) level. The Greek political situation has yet to translate into broad based Euro weakness and it won’t be until later this month that we get to see how negotiations on Greece’s debt pile develop. There is support for the pair around 0.6380 (resistance around 1.5674) and as long as the cross holds above that level I favour a test back up toward 0.6500 or higher (1.5385 or lower). A break below 0.6380 (above 1.5674) would be a warning sign that further NZD weakness is likely to follow. From Europe over the coming days we get the final reading from Service sector PMI, retail sales, German factory orders, and the EU economic forecasts. While from NZ, we have Fonterra’s latest dairy auction, employment data and a speech from Governor Wheeler to digest.

 NZD/YEN

After snapping below 86.00 in the wake of last Thursday’s RBNZ rate statement this pair has maintained its soft footing with a couple of brief investigations below 85.00. A small bounce in the past 24 hours is nothing to get excited about with 86.00 capping the topside for the pair so far. This keeps the focus on the downside with the target a test of support around 83.50. The highlight of the Japanese economic calendar this week will be average cash earnings data on Wednesday. While from NZ we have Fonterra’s latest dairy auction, employment data and a speech from Governor Wheeler to digest.

AUD/USD

Recent sharp declines in the Australian dollar have paused for the time being and a small recovery to just over 0.7800 was seen last night. That recovery was helped by a couple of soft data points released from the US in the past few days. A weaker than expected US GDP figure on Friday combined with a fall in the ISM manufacturing index last night has seen the USD give back some ground against most other currencies over the last 24 hours. However, direction from here will be determined by the outcome of today’s Reserve Bank of Australia meeting. An interest rate cut should see the AUD quickly trade down through 0.7700, although I suspect the central bank won’t pull the trigger just yet. They could easily signal a move to an easing bias however and in this situation dips in the AUD will likely be limited. If the RBA simply maintain their current neutral bias the Australian dollar would stage a sharp rally which could eventually test resistance around 0.8000.

AUD/GBP (GBP/AUD)                            

The Australian dollar has lost substantial ground to the UK Pound recently and the past week was no exception. The pair traded to a low of 0.5124 (high of 1.9516) heading into the weekend and although we have seen a small recovery from those AUD lows in the past 24 hours, the cross has failed to gain a foothold above the 0.5200 level (below 1.9231). Although this keeps the near term focus on the AUD downside, the reality is direction from here will be decided by the result of the RBA’s rate meeting today. A cut from the RBA will see sharp losses for the pair and a likely test of the 0.5070 support area (1.9724 resistance). If the RBA maintain their current ‘neutral’ stance a move up toward the 0.5350 level (down toward 1.8692) could easily develop. Later in the week from Australia we also get retails sales data to digest, while from the UK we have construction and service sector PMI’s along with the Bank of England rate meeting.

AUD/EURO (EURO/AUD)

Weakness in the Australian dollar drove this pair down below the 0.6900 (above 1.4493) level last week and it has so far failed to make any meaningful recovery. The market is now treading water waiting for the outcome of today’s RBA rate meeting and this event will dictate near term direction. The Greek political situation has yet to translate into broad based Euro weakness and it won’t be until later this month that we get to see how negotiations on Greece’s debt pile develop. Expect some volatile price action in the immediate aftermath of today's RBA announcement with a cut from the central bank likely to push the pair below 0.6800 (above 1.4706). On the flip side if the RBA maintain their current neutral stance the cross could easily rally toward 0.6950 (1.4388). Later in the week from Australia we also get retails sales data to digest, while from Europe over the coming days we get the final reading from Service sector PMI, retail sales, German factory orders, and the EU economic forecasts.

AUD/YEN

The past two weeks have seen sharp losses for this pair and there is no sign yet of a bottom forming. Although losses have stall over the past few days, the cross has failed to recover above the 92.00 level and this keeps the focus on the downside. The market is waiting to see the outcome of today’s RBA rate meeting and this will be the key to near term direction. It is a close call whether the central bank cuts or not and as such we could get a significant reaction in the AUD either way. A sustained break above 92.00 will target a move toward 94.00. If the RBA do cut interest rates, expect quick test toward 90.00 and potentially 88.00 further out.

AUD/CAD

Both the Australian dollar and the Canadian dollar have seen periods of pressure over the past week and this has seen the cross gyrate between 0.9750 and 0.9950. Declining commodity prices are weighing on both currencies with the CAD seeing extra pressure late last week after disappointing GDP data hit the wires. Direction from here however will be determined by the outcome of today’s RBA rate meeting. There is plenty of talk about an interest rate cut and this would see the AUD under further pressure. The cross would likely trade down through 0.9750 in very short space of time. If however the RBA don’t cut, and maintain their current neutral bias, the AUD could stage a significant rally. At test toward 0.9900 would likely ensure under that scenario. Later in the week from Australia we also get retails sales data to digest, while from Canada we have Ivey PMI, the trade balance, building permits and employment change data.

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